UK: Nixed: US Withdraw From Iran Nuclear Deal

It was already clear by the time President Trump addressed the
assembled White House press corps on Tuesday 8th May that the US
was going to put some sort of dent in the Joint Comprehensive Plan
of Action (JCPOA), the clunkily named nuclear deal reached between
the P5+1 (the permanent 5 UN Security Council members plus Germany)
and Iran. But any doubt as to the extent of the damage he was
prepared to do to the deal was emphatically blown away as the
President announced the re-introduction of what he termed the
"highest level of economic sanctions".

The Iran deal was always a creature of compromise. Aside from
its utilitarian moniker, it was dependent for its survival on
continued waivers of US secondary sanctions by the US President (a
function of the congressional approval of the deal in the first
place). It was also limited – quite deliberately – in
the scope of its ambition: it did not seek to settle disputes
concerning Iranian intervention in regional conflicts, Iran's
human rights record or its ballistic missile program. And, much to
the chagrin of Iran hawks in the US and elsewhere, the sunset
clauses place no restriction on Iran's uranium enrichment after
the first 15 years of the deal. From the Iranian side, whilst it
provided relief against EU sanctions and US extraterritorial
secondary sanctions, it offered Iran no access to the US economy
or, crucially, the US dollar denominated financial system.

But, imperfect as it was, it did result in the destruction of
Iran's stockpile of enriched uranium and afforded the
International Atomic Energy Association (IAEA) access to Iran's
nuclear sites to verify continued Iranian compliance. And it has
allowed Iran access to major European investment in Iran; including
high profile deals struck with Airbus and French oil major
Total.

In any event, some of the lingering congenital defects would not
have mattered as much, or at all, were it not for other extraneous
events. For example, it was always intended by the Obama
administration that the JCPOA would be a starting point for further
discussions and deals on other areas of difference once the nuclear
boil was lanced; negotiating the nuclear settlement was lengthy
enough without complicating the negotiations further by involving
issues such as Syria and ballistic missiles. And continued
sanctions waivers were never thought to be seriously in doubt, even
as the Trump campaign gained momentum throughout 2016. The State
and Treasury Department reach out sessions following Implementation
Day emphasised that the political consequences of a US lead
snapback would be so serious that the next President would balk at
tearing it up, even if that President was a candidate who described
the deal as the "worst ever".

Fix it or nix it

Even after further criticism of the deal from the newly
inaugurated President Trump, that conclusion seemed to hold good.
Early forays into extending sanctions against Iran with SDN
designations in February 2017 were limited in scope. They did not
designate Iranian financial institutions or state owned
enterprises. Indeed, they were no different in character to some of
the late Obama administration's post Implementation Day Iran
designations. Many concluded that moderate voices within the
administration had managed to constrain the President's more
hawkish impulses.

But the President has continued to be a vocal critic of the deal
and has been ramping up his rhetoric in recent months, and the lack
of much perceived benefit from the deal in Iran has meant that the
defects began to matter much more. The appointment of two key Iran
sceptics, John Bolton (National Security Advisor) and Mike Pompeo
(Secretary of State) effectively sealed the fate of the Iran deal,
providing President Trump with a core of foreign policy advisors
who shared his dim view of Iran deal and wanted it
"nixed".

The initial fear was that President Trump would refuse to renew
the next set of waivers that were due to expire. The complex manner
in which the US sanctions were imposed - piecemeal through a number
of Congressional acts and Executive Orders - and in which the
waivers were put in place meant that different sets of sanctions
expired at different times. The waiver of the secondary sanctions
providing for penalties against foreign financial institutions that
engage in significant financial transactions with Iran's
central bank were due to expire on 12th May. Other secondary
sanctions targeting broader economic activities were due to expire
in July 2018.

However, President Trump chose to announce the reintroduction of
the whole gamut of US secondary sanctions, and withdraw various
general licences issued pursuant to the JCPOA, without waiting for
the waivers to expire. When "wind down" periods of 90 and
180 days (dependent on the types of sanctions concerned) are taken
into account, this means that US secondary sanctions will
effectively come back into effect on 6th August 2018 and 4th
November 2018.

In particular, after 6th August 2018, the US will re-impose
sanctions on:

the purchase or acquisition of U.S.
dollar banknotes by the Government of Iran;

Iran's trade in gold or precious
metals;

the direct or indirect sale, supply,
or transfer to or from Iran of graphite, raw, or semi-finished
metals such as aluminium and steel, coal, and software for
integrating industrial processes;

significant transactions related to
the purchase or sale of Iranian rials, or the maintenance of
significant funds or accounts outside the territory of Iran
denominated in the Iranian rial;

the purchase, subscription to, or
facilitation of the issuance of Iranian sovereign debt; and

Iran's automotive sector.

Moreover, after 4th November, the US will re-impose sanctions
on:

Iran's port operators, and
shipping and shipbuilding sectors, including on the Islamic
Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran,
or their affiliates;

petroleum-related transactions with,
among others, the National Iranian Oil Company (NIOC), Naftiran
Intertrade Company (NICO), and National Iranian Tanker Company
(NITC), including the purchase of petroleum, petroleum products, or
petrochemical products from Iran;

transactions by foreign financial
institutions with the Central Bank of Iran and designated Iranian
financial institutions;

the provision of specialized
financial messaging services to the Central Bank of Iran and
Iranian financial institutions;

the provision of underwriting
services, insurance, or reinsurance; and

Iran's energy sector.

General licences allowing foreign subsidiaries of US companies
to engage in transactions with Iran in specified circumstances are
also being withdrawn and Iranian financial institutions and
government of Iran entities will be added to the SDN list, with
secondary sanctions consequences for non-US persons who deal with
them. The President's announcement is of nothing less than a
wholesale reintroduction of the pre-implementation day US secondary
sanctions regime.

Caught in the middle

All of this concerns the EU greatly. The EU sees the JCPOA as
the most effective way to stop Iran obtaining a nuclear weapon, and
precipitating a nuclear arms race in the Middle East that will
potentially involve Gulf Arab states, Turkey, Egypt as well as
Israel. As the EU points out, the IAEA has repeatedly confirmed
substantial Iranian compliance with the terms of the deal.

The immediate reaction to President Trump's announcement
from the UK, France and Germany was "regret and concern"
at the US action and an expression of a continuing commitment to
the deal. The UK's Office of Financial Sanctions Implementation
has emphasised that the UK Government continues to fully support
expanding Britain's trade relationship with Iran and encourages
UK businesses to take advantage of the commercial opportunities
that arise. However, it went on to highlight that the re-imposition
of US sanctions may have implications for UK businesses and
individuals dealing with Iran.

And there is the rub. The President's announcement will see
European companies that have chosen to engage with Iran since
Implementation Day exposed to US secondary sanctions after 6th
August and 4th November; the first time there has been a
significant divergence on Iran policy between the US and EU on what
EU companies can do.

The US did not relax its own self-denying sanctions preventing
US persons dealing with Iran after Implementation Day; only the
secondary sanctions affecting non-US persons. By contrast the EU
lifted most of its general restrictions on trade with Iran except
for those on controlled good or remaining designated persons. As a
result, European companies that have been able to find means of
getting paid (not an easy task when US dollar transactions are
still proscribed) have engaged with Iran more enthusiastically
– a fact that is no doubt not lost on a President currently
jostling with the EU over aluminium tariffs. The unilateral
re-imposition of US secondary sanctions will impact these European
companies. The recent application of US secondary sanctions against
certain Russian companies and oligarchs illustrates some of the
problems that this can cause.

Historically the threat of a divergence between the US and EU
over Iran has never been a problem. The two have managed to proceed
in concert with each other so that US sanctions which unilaterally
sought to regulate or restrict trade and investment activities
carried out by persons outside the US were mirrored by the EU's
own regulations and restrictions on what EU persons are able to do.
But there are earlier precedents for transatlantic fallings out
over the extraterritoriality of US sanctions.

In the 1980s the US imposed sanctions on companies doing
business on a Russian pipeline in Eastern Europe, provoking a
diplomatic falling out. And in 1996 the Helms-Burton Act, which,
amongst other things, imposed penalties upon non-US persons
"trafficking" in Cuban property formerly owned by US
persons, provoked a furious response from the EC which launched
blocking legislation and a WTO panel investigation alleging that
the extraterritorial restriction of trade between the EC and Cuba
breached various provisions of the GATT and GATS. The US countered
that it was prepared to rely on the rarely used national security
exemption in the GATT. The dispute was only withdrawn after high
level political compromise.

But the prospect of a large scale transatlantic trade dispute
over Iran developing at the same time as a US / EU dispute over US
aluminium tariffs and extraterritorial Russia sanctions is deeply
concerning for the EU.

The tough decision for many EU companies – and one that
they never had to consider before Implementation Day because the
activities were directly sanctioned by the EU in any event –
is whether they can risk continuing engagement with Iran without
infringing the renewed US secondary sanctions, which are sometimes
couched in much less specific terms than the old EU prohibitions.
The penalties for breaching US secondary sanctions are not fines or
custodial sentences but they can be severe; they include the denial
of access to the US financial system and potentially being
designated as a SDN. It may be a decision that is taken out their
hands, however, if banks and other financial institutions that they
rely on insist that all forms of trade with Iran are ceased in
light of the reintroduction of US secondary sanctions.

What happens to the JCPOA?

What, then, is the status of the JCPOA now that one (but so far
only one) of the parties to it has abrogated its terms?

The JCPOA obliges the US not only to cease the application of
its secondary sanctions program but to "continue to do
so". The triggering of the re-introduction of sanctions on 6th
August is, therefore, a breach by the US of the terms of the
agreement. But the agreement, for what it is worth, remains in
force between the other parties. President Rouhani of Iran has
expressed a hope that the agreement can continue to remain in force
if the EU maintains its own sanctions relief (Russia and China did
not impose unilateral sanctions against Iran prior to
Implementation Day and so the question of their continued relief is
irrelevant). And a senior Trump administration official was quoted
immediately after the President's announcement indicating that
the US will not seek to trigger the snapback of UN sanctions under
the mechanism provided for in JCPOA and UN resolution 2231.

Iran could, in theory, refer the issue of the US breach to the
JCPOA dispute settlement mechanism where the question of US
compliance could be considered by the Joint Commission established
under Annex IV of the JCPOA. But that process cannot prevent the
reintroduction of US sanctions. Even if the US does not participate
in the Joint Commission (and presumably it will not in
circumstances where the President has positively ended
participation in the JCPOA) the only possible outcome from the
almost month long process is the automatic snap back of UN
sanctions, which Iran has no interest in fomenting.

The deal could, in theory, limp on for some time with the EU and
Iranians keeping to their respective sides of the agreement, and
with tentative Iranian business being pursued by businesses in the
EU, Asia and elsewhere outside the US. However, it is likely that
such business will be more limited now, particularly given the
already risk averse approach of financial institutions generally.
The question is how long Iran's own hard liners, already
opposed to the deal in principle, are willing to continue with such
a compromise. They may see the US move as just the opportunity Iran
needs to commence uranium enrichment again, free from any guilt for
abrogating the deal itself. The EU will find it difficult or
impossible to continue their own support for the deal and provide
continued sanctions relief in those circumstances.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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On 8 May 2018, the US announced that it was withdrawing from the Joint Comprehensive Plan of Action (JCPOA) and would re-impose all US sanctions that were lifted when the JCPOA was implemented in January 2016.

Multinationals might soon find themselves caught in the middle of more US-EU trade tensions as the EU prepares to block the extra-territorial effects of the sanctions which the United States ("US") ...

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